SWIFT Business Forum South Africa 2016

Business Forum South Africa 2016

South Africa – Facing Economic Reality

The Business Forum South Africa took place in Johannesburg on 24 August 2016. The event attracted delegates from across the South African industry to discuss the challenges facing South Africa’s economy and how best to address them.

Hugo Smit, Head of Sub-Sahara Africa for SWIFT opened the conference and shared SWIFT’s latest traffic growth.

South Africa remains a key market for SWIFT; 53% of all SWIFT traffic in Africa takes place in South Africa. This is as a direct result of the fact that the country was an early innovator in the financial services industry. It was one of the first adopters of RTGS globally, one of the first 15 global currencies to join the CLS system, and was a very early adopter of SWIFT standards in the securities industry. Today the securities market settles more than 173,000 trades on a daily basis.

“It is remarkable to consider that the Securities Market has been able to accommodate the growth in the daily trades without interruptions or major infrastructure upgrades. It is the result of the vision of the financial services industry in the 1990s,” said Smit. “This is when the seeds were sown.”

South Africa continues to demonstrate its commitment to financial sector innovation. Today the adoption of ISO20022 is being considered in various projects, the community actively participated in the SWIFTSmart e-learning pilot, several of its largest banks are part of the SWIFT global payments innovation initiative and the success of the SIRESS regional payment system is widely recognised.

It is remarkable to consider that the Securities Market has been able to accommodate the growth in the daily trades without interruptions or major infrastructure upgrades. It is the result of the vision of the financial services industry in the 1990s. This is when the seeds were sown.

Hugo Smit, Head of Sub-Sahara Africa, SWIFT

Private Public Partnerships key to South Africa’s success

Ian Cruickshanks, Chief Economist at the South African Institute for Race Relations, shared a very honest and pragmatic view of the future of South Africa’s economy. “We need to be realistic,” he said. “This is Africa and the unexpected will happen.”

Cruickshanks outlined how an unstable labour force, crime, corruption and inadequate service delivery are the key factors challenging South Africa’s economic growth, which is currently at 0%. There is such uncertainty that the country is struggling to raise development capital. Foreigners have sold billions of rand in recent months, and another 1.5 billion was sold last week.

He said that the government recently admitted that its strategy for the economy is not working and it needs to do something about it. So what is the alternative?

"Public private partnerships are key. Government needs to include more business leaders in the development of its strategy,” said Cruickshanks. “In the short to medium term, we will face tough times. However we have survived a lot. We are likely to see sense and democracy prevail, but we have to be patient. The commodities cycle will turn and South Africa’s economy will recover.”

Public private partnerships are key. Government needs to include more business leaders in the development of its strategy.

Ian Cruikshanks, Chief Economist at the South African Institute for Race Relations

De-risking on the rise in South Africa

Harry Newman, Head of Banking, SWIFT, led the discussion around de-risking. According to new SWIFT data, de-risking is on the rise in several African countries including South Africa, which saw the number of its foreign counterparties fall by more than 10% between 2013 and 2015.

There are perhaps two main regulatory drivers behind de-risking,” said Newman. “One was the financial crisis of 2008/9 when major players were helped by governments and subsequently have been required to reduce their appetite for risk and/or hold more collateral. The second is financial crime compliance. The latter creates a regulatory environment that forces correspondent banks to assess their risk and relationships in more depth, which carries a greater cost.”

Isaac Kamuta, Head of Cash Management at Citibank, explained that the bank has to be extremely careful about its relationships. “You don’t want to be the one responsible for facilitating a bad transaction. We have invested in technology to monitor compliance, however, this is costly and you need to employ a team to analyse it. It also now costs far more to develop correspondent bank relationships – the decision goes through multiple committees on a country, regional and global level. You really have to determine whether a relationship could be profitable.”

Willem Kruger, Head of Compliance and Regulatory Products for Nedbank, stated that local banks such as Nedbank have had to both consolidate their relationships with other local banks and invest in changing their systems and processes to ensure they are not de-risked.

“International banks will test you to ensure that you are doing exactly what you said you would do,” said Kruger. “Lip service is no longer enough. The best way to maintain relationships is to invest and ensure you comply. It is also not only about local regulation. If you are dealing with a bank that operates in the US, you need to understand US regulation.”

International banks will test you to ensure that you are doing exactly what you said you would do. Lip service is no longer enough.

Willem Kruger, Head of Compliance and Regulatory Products, Nedbank

The process of regional harmonisation should make compliance easier for local banks. “Regional integration will help ensure that regulatory standards are harmonised and regulators can provide assistance across the region,” said Stephen Mkwanazi, Manager of Anti-money Laundering and Review Teams at the South African Reserve Bank (SARB). “SARB has been working with colleagues across the region for over three years to assist them in improving the capacity of their supervision and ensuring experience and expertise is shared.”

Disruptive technologies – friend or foe?

A wave of new entrants is targeting the payments landscape and challenging traditional banking models. But can the disruptive technologies on which they are built also provide an opportunity for existing players?

Gerrie Butler, head of Corporate Banking eSolutions at Rand Merchant Bank, sees change as inevitable. “New entrants in the market will chisel away at what’s in place,” he said. “What we have established works well, but do we need to throw more in the same direction or do we change direction? We need to look at the new models and see what can be used. Ultimately we need to give the customer what they are looking for: visibility, certainty and speed of processing.”

Chris Hamilton, CEO of BankservAfrica, agreed that evolution is unavoidable due to the increasing complexity of the community. “All around the world there is a global evolution in payments infrastructure,” he said. “Our job is to ensure that South Africa keeps up with the pack. There is significant work that needs to be done.”

All around the world there is a global evolution in payments infrastructure. Our job is to ensure that South Africa keeps up with the pack.

Chris Hamilton, CEO of BankservAfrica

The South African Reserve Bank is aware of the need for change, said Hamilton, and will soon publish its Vision 2025 document which is expected to endorse the idea of infrastructure evolution more broadly to support public policy goals such as economic development and financial inclusion.

Tom Newton-King, a mobile a strategic payments consultant, noted that providing financial services to the unbanked is actually becoming a profitable line of business. “Innovative technology is serving this group of people since incumbents are not providing the services that people need. Banks are now realising the value of the bottom end of the pyramid.”

Hamilton stressed that it is critical that future payment systems are designed to be flexible so that they can handle different use payments. Butler agreed. “At the SWIFT African Regional Conference in Mauritius this year, SWIFT Innotribe held a start-up challenge for tech start-ups in Africa. The common theme for these pitches was the lack of interoperability.”

So how easy is it to integrate new technology into existing legacy systems? “It won’t be easy, but it is not impossible,” said Newton-King. “As these innovative payment systems become ubiquitous, incumbents will begin to include them in their network.”

And what about blockchain and distributed ledger technology?

Butler noted that blockchain has real potential to impact services. “We are ignorant if we do not see it as a game changer,” he said. “The challenge [for any blockchain implementation] is that we work in a highly regulated space and up until now blockchain has been based on anonymity. Risk management is all about monitoring, reporting and ‘know your customer’. How can we marry the promise of blockchain without cutting corners? How do we bring it in in a way that protects infrastructure and the customer?”

Holistic approach needed to tackle cyber risk

Susan Potgieter, General Manager of the Information Hub at South African Banking Risk Information Centre, explained that South Africa is in an exciting phase when it comes to cyber risk and crime. “A cyber bill is in development, and while we lag a little behind other global regions, this is actually an advantage. We can learn from experience and borrow legislation to get it right the first time,” said Potgieter.

When it comes to cyber security Potgieter argues that it is wrong to just throw tech at the problem. “We need holistic and multi-pronged strategies,” she said. “And in fact, technology is no longer the principle concern. The individual is now the weakest link.” Phishing still works in South Africa, and criminals are becoming increasingly sophisticated in the way they target individuals.

Potgieter added that South Africa is facing some major challenges in tackling cybercrime. Most significantly, there is a lack of expertise in the sector. Getting the right man for the job is difficult.

That said, the community is working together to face these challenges. “It is important for South Africa to be cyber ready and acknowledge that we have a role to play. It is everyone’s responsibility,” said Potgieter. “We need to find the opportunities and collaborate instead of panicking.”

Correspondent banking fights back

The next session focused on the future of payments and how correspondent banking is stepping up to compete with a new wave of FinTech companies operating in the payments space, and an increased demand to make correspondent banking faster, more transparent and traceable.

Rob Green (SWIFT Board Member) and Harry Newman, Head of Banking, SWIFT, discussed the SWIFT global payments innovation (gpi) initiative, though which SWIFT has brought together the existing corresponding banking network to review and rejuvenate its model. Announced in December 2015, the initiative aims to dramatically improve the cross-border payments experience through greater speed, transparency and end-to-end tracking.

Built upon existing foundations, the initiative will introduce a tight service level agreement and build in a cloud-based tracking service that will allow banks to monitor and track payments.

“Seventy-eight banks have already signed up to the SWIFT gpi initiative,” said Newman. “We are making it as easy as possible to adopt since we are still using existing rails to carry messages. We encourage banks to join the gpi project. This will enable them to provide input on the process and start thinking how they can build products and services around the new rule book.”

We encourage banks to join the gpi project. This will enable them to provide input on the process and start thinking how they can build products and services around the new rule book.

Harry Newman, Head of Banking, SWIFT

The impact of an evolving market structure

South Africa’s securities markets have grown in leaps and bounds. Despite the economic downturn, the country is still an attractive destination.

The landscape in South Africa is changing rapidly. “We are on the cusp of a very significant change in market structure in South Africa,” said Donna Nemer, Director of Capital Markets at the Johannesburg Stock Exchange. “The biggest drivers of change are regulation, technology, new market entrants and calls for increased transparency.”

We are on the cusp of a very significant change in market structure in South Africa. The biggest drivers of change are regulation, technology, new market entrants and calls for increased transparency.

Nemer explained that an ideal market structure should maximise national liquidity, ensure immediacy of trading while being transparent, increase the number of buyers and sellers in the market, minimise transaction costs and maximise the integrity of the settlement cycle. “At the end of the day all of this is intended to benefit the investor,” she said.

Chris Reddy, Head of Fixed Income at Mazi Capital, noted that an efficient market is critical for an investor. “There needs to be sufficient liquidity and a secure and stable environment,” he said. “Increased competition from new entrants is also usually good for the end user. It keeps everyone honest and forces existing players to improve their product offering.”

Hari Chaitanya, Head of Investor Services Product Management and Transactional Product & Services at Standard Bank, explained how the development of the global securities markets has impacted custodian banks.

“We are facing three major challenges as a custodian bank. Firstly, clients expect us to inform them on exactly what is going on, not just in the region but globally. Though I am based in Africa, developments in Europe such as T2S will also impact my clients so I need to be on top of them. Secondly, we have to ensure there is very active engagement between market players and regulators. Lastly, the increased focus on compliance is providing its own set of challenges. In this sense, the role of the custodian has changed and we are far more actively involved in monitoring and reporting.”

Strate’s blockchain journey

Tanya Knowles, Head of Projects, Innovation and Business Services at Strate, explained how the company is embracing innovation to remain competitive.

“We started our blockchain journey a year ago,” said Knowles. “It is important to apply new technology and keep up with technological change.”

Knowles argued that the very nature of the securities market and blockchain technology means that this cannot be done alone. “Initially many people tried to look for the competitive advantage around blockchain. However there is no advantage in developing it individually – distributed ledger technology is all about information being shared with everyone in the chain. You have to collaborate,” She said.

Strate began by holding informal discussions with banks and formed a market group focused on innovation labs and technology departments within the banks while involving a regulator as an observer. On a global level, Strate is participating in a worldwide initiative for CSDs to get together and research how blockchain can be used to change the space.

The biggest fear for all of us is that if we sit on our laurels, we’re going to get ‘ubered’.

Tanya Knowles, Head of Projects, Innovation and Business Services, Strate

There are of course challenges, added Knowles. Organisations have legacy systems and business in place that they are trying to protect. No one wants to put something forward that might disrupt their business.

It is also not about change for the sake of change. “We’ve achieved amazing things with settlements in South Africa, but we are looking at whether there is a better way to do what we’re doing,” she said. “What if settlements could take 10 minutes instead of 3 days? The biggest fear for all of us is that if we sit on our laurels, we’re going to get ‘ubered’.”